US investor appetite for reverse convertible securities remains as high as ever, according to providers rolling over maturing products into very similar contracts.
Although some manufacturers are ready to move to investments with newly-crafted payout structures, one provider told SRP they continue to offer what the market wants in order to maintain market share.
“We’re not seeing a major swing from the buying side, but the market would love nothing more than a marketable move to different payouts,” said John Tessar, product manager for structured products at LaSalle Broker Dealer Services Division. Investors, however, have whole-heartedly embraced reverse convertibles especially those sold through third-party distributors. The newer three-month issues have been of particular interest, he added.
Investors have been gobbling up reverse convertible securities which typically have maturities from three months to one year. Confidence has grown as investors have taken them for a test-drive, and their typically shorter maturities have meant investors can more quickly judge whether they find them appealing.
The litmus test has been whether these investment products did exactly what they said that they would do, Tessar added. It typically takes investors much longer to decide about other structured products with far longer maturities, such those with partial- or 100%-principal protected features, he said.
Barclays Bank’s 18% Reverse Convertible Notes, Southwestern Energy Co and ABN Amro Bank’s 16.25% Knock-In Reverse Exchangeable Securities – Corning mature today.
Like all reverse convertibles, the notes have a high headline rate, paying 18% pa monthly throughout the investment, in the case of Barclays’ six-month product linked to Southwestern Energy. Capital repayment at maturity is 100% if the final share level is equal to or greater than the initial level, or if the underlying does not fall 20% or more during the investment. If the underlying does fall 20% or more during the investment and the final share level is lower than the initial level, capital is lost on a one-for-one basis, with physical delivery.
ABN Amro’s product, also of six-months duration, pays 16.25% pa, monthly throughout the investment and has the same capital repayment formula.
These products are available now in maturing products (USA).
